New Zealand Offshore Investment Tax Changes
Published on 21 September 2006
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The Finance and Revenue Ministers in New Zealand have been working together with the financial services industry to come up with some New Zealand offshore investment tax changes to make the taxation of overseas investments fairer and at the same time to bring offshore and onshore investment vehicles somewhere in line in terms of attractiveness and competitiveness.
The proposed changes were revealed to the government last week and are now in the hands of a review panel from the Finance and Expenditure Select Committee. So far the changes have received a positive reception from all sides in the argument about the New Zealand taxation of offshore investments and this article offers an overview of the proposed changes for ShelterOffshore readers…
Currently the New Zealand government is aware that domestic medium and high net worth individual investors are able to utilise certain types of offshore investment vehicle that pay low or no dividends annually which allows these investors to legitimately avoid paying tax on their investments. Under the new ‘fair dividend rate’ proposals by the New Zealand Finance and Revenue Ministers investors will be taxed on a maximum of 5 per cent of the value of their offshore shares in a given tax year.
In the case that an investor’s portfolio of offshore investments returns them in excess of 5% gains they will not be taxed on this excess.
In the case that an investor’s portfolio of offshore investments returns them less than 5% gains they will be taxed on the percentage returns they receive only.
In the case that an investor’s portfolio of offshore investments returns them negative returns – i.e., they make a loss from their offshore investment portfolio in a given tax year - they will not be taxed.
Neither losses nor additional gains will be carried over under the proposals currently before the Finance and Expenditure Select Committee.
There will be no difference between dividends received and capital gains derived for the purposes of this taxation.
To illustrate the New Zealand offshore investment tax changes with some examples: -
Where investor A has an offshore investment portfolio worth NZD 100,000 at the start of a tax year and he derives NZD 5,000 in capital gains and he receives a dividend of NZD 5,000 he will only be liable to pay 5% of the initial fund value of NZD 100,000 at the end of the tax year – i.e., NZD 5,000.
If investor A only derives NZD 3,000 in capital gains and does not receive a dividend he has only received a 3% return on his initial investment of NZD 100,000 and can therefore apply to reduce his fair dividend rate accordingly.
In investor A is unlucky enough to have invested in a poorly performing offshore investment vehicle and his initial NZD 100,000 value at the start of the tax year is whittled away to just NZD 80,000 at the end of the tax year he can apply to pay no tax at all on this investment under the terms of the new fair dividend rate.
The reason the Finance and Revenue Ministers have set a level of 5% taxation is because historically the most popular offshore investment vehicles favoured by investors over the past 50 or so years have returned an average of 8% gains annually therefore they feel the 5% fair dividend rate is…well…fair!
These proposals aim to allow those who invest offshore the ability to derive gains and earn dividends whilst paying a certain amount of tax towards the governmental services that make New Zealand such an attractive first world country in which to live. They also aim to reduce the huge discrepancy in competitiveness that currently exists between offshore and onshore financial services providers to allow onshore providers a fairer platform to compete upon in terms of attracting new investors.
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